How to Pick a Stock: 5 Considerations for Beginners
3 min read
Everyone wants to know how to find stocks that will go up in value. Sometimes, that's easier said than done – but a solid long-term strategy and a diverse portfolio go a long way.
For beginner investors, the first step in earning capital gains (aka your returns in the stock market) is knowing how to pick a stock. So what's involved? Here are five factors to think about.
1. When picking a stock, consider your time horizon.
In investing, a "time horizon" is an estimated amount of time you expect to hold a stock before selling (hopefully for a profit). Some stocks have a history of returns after a few months or years, but others are better suited for decades.
By defining your time horizon, you can narrow down which types of stocks work best for you.
2. Does the stock line up with your risk tolerance?
Some stocks are riskier than others. That's the nature of investing, but not everyone is ready for maximum risk. In reality, everyone has a different risk tolerance, but you can define your own tolerance to risk as low, medium, or high.
Someone with a lower risk might choose a stock with a long history of positive returns, like Adobe (NASDAQ ADBE), which went public in 1986 and grew more than 226,000% in about 35 years.
On the other hand, someone with high risk might invest in a brand-new IPO or pre-merger SPAC (special purpose acquisition company).
3. How to pick a stock based on investing themes
Everyone says to diversify, diversify, diversify. But how do you actually do it? You can start by choosing a handful of investing themes you want to stick to and choose a few stocks in each category.
Some common examples of investing themes are consumer staples (necessities), consumer discretionaries (non-essential), energy, and tech. Modern themes include cybersecurity, renewable energy, stay-at-home products, and gaming – just to name a few.
4. Review the company's latest earnings reports.
Once you've settled on a company you like and understand, you'll want to review the logistics. For stocks on U.S. exchanges, head to the SEC EDGAR search.
Type in the company's name or ticker. Find the latest form 10-K (audited annual report) or 10-Q (unaudited quarterly report). Don't get overwhelmed by the long document. Start by reading the blue-striped earnings table with information on revenue, profit, and loss.
For newly public companies or companies waiting for their market debut, you can find this information on EDGAR through a form S-1.
5. How to pick a stock based on dividend potential
Some companies offer dividends, or earnings per share (EPS) that come around on a regular basis. This is a form of passive income. You can automatically reinvest dividends to compound your return without having to buy more shares. For example, investment firm BlackRock (NYSE:BLK) is paying out 1.88 percent of an $876 stock, which adds about $16.52 to your investment annually.
With fractional investing available, even expensive stocks are attainable for investors with little money. Stocks that pay out dividends on a regular basis are a good thing to include as part of your portfolio.
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